Need cash fast?

What to consider before taking out a short-term loan.

Unexpected expenses, such as car repairs or medical bills, can sometimes make it hard to make ends meet and you may be tempted to take out a short-term loan to tide you over until pay day.

RACQ Financial Advocacy Analyst Nathanael Watts breaks down the different types of short-term loans.

Payday lenders

You’re likely to see payday lenders, such as Nimble, Wallet Wizard and Cash Converters, advertising on TV and the internet.

Payday lenders are regulated by the Australian Securities and Investment Commission (ASIC) and the Australian Financial Complaints Authority (AFCA) but you should still be wary about the costs of borrowing money from them.

In fact, the Australian Government requires payday lenders to include a warning on their website about the expense and pitfalls of borrowing small amounts of money. This is often written in small print at the bottom of the website or required you to click a link to read the warning.

Anyone considering using a payday lender should follow the suggestions listed in this warning. This type of lending should only be used as a last resort if absolutely necessary.

ASIC MoneySmart’s payday loan calculator can help you consider the total costs of a payday loan.

Microfinance providers

Community organisations, such as Good Shepherd Microfinance, No Interest Loan Scheme (NILS) and Step Up Loan, provide low or no interest loans.

These loans are limited to essential items such as white goods, furniture, medical services and education items. 

Eligibility requirements also apply, including being on a low income, having a healthcare/pension card and the ability to repay the loan.

Buy now, pay later

Buy now, pay later services, such as AfterPay and Zip Pay, are available for retail purchases.

In many instances you won’t pay anything extra when using these services with the costs borne by the retailer.

It’s important to remember that purchases made using these services take an extended period of time to pay off.

Purchasing a $100 outfit for the weekend using AfterPay may seem simple and not cost you anything extra, but you may be repaying the amount over the next eight weeks. 

If you make repayments using a credit card you may be charged credit card interest can add much more to the original purchase price of the outfit.

Ensure you meet your repayment obligations as fees accrue if you miss a repayment or extend your repayment period.

Payday advances

Payday advance companies, such as Earnd and InstaPay, allow workers to access up to 50% of their accrued pay early, at a cost of up to $2 per withdrawal.

While living pay-to-pay can cause financial stress, an advance on your pay won’t solve your money problems as it means you’ll have less money to spend during your next pay period and you may find yourself regularly relying on the service.

Consider creating a budget and speak to a free financial counsellor to help you get back on track.

What to consider before taking out a short-term loan

  • Decide if you really need the money now. If you want to purchase something, consider saving for it so that you’re not going into debt.
  • Follow the advice in the government warning on payday lenders:

- Speak to a free financial counsellor who may be able to help you with better long-term solutions.

- Are you able to renegotiate? Many companies, including utilities like phone, internet and electricity providers, may offer repayment options if you can’t pay the bill in full by the due date.

- Talk to Centrelink about an interest-free payment advance.

  • Be wary of providers that require you to pay the first repayment instalment immediately. This increases the cost of the loan without any benefit.
  • Short-term loan applications will appear on your credit file for the next five years. This can be looked at unfavourably when you apply for other forms of finance, including home and car loans.
  • Not all payday lenders provide only short-term loans. Short term loans are limited to $2000, so if you borrow more than $2000 different rules will apply, including interest charged.
  • It’s important to shop around.

The information in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in the document is general advice and does not take into account any person's particular investment objectives, financial situation or needs. Before acting on anything based on this advice you should consider its appropriateness to you, having regard to your objectives, financial situations and needs.